Press Release No. 18/129

IMF staff completes 2018 Article IV mission to Honduras

April 13, 2018

An International Monetary Fund (IMF) mission, led by Roberto Garcia-Saltos, visited Tegucigalpa during April 3-12 to conduct the 2018 Article IV consultation.

At the conclusion of the visit, Mr. Garcia-Saltos issued the following statement:

“Boosted by the successful stabilization program that started in 2014, the Honduran economy continues to perform strongly. Sustaining the achieved gains requires preserving macroeconomic stability and strengthening the institutional framework, both critical for job creation and poverty reduction.

“In 2017, economic performance was better than expected. Real GDP grew at 4.8 percent supported by good harvests, strong public investment, and robust private consumption growth amid record remittances inflows. These inflows, together with stronger performance in coffee exports, also led to further compression in the external current account deficit to 1¾ percent of GDP. Net international reserves increased by US$883 million, boosted by a US$700 million external bond issuance, leading to reserve coverage of 5.3 months of non-maquila imports of goods and services.

Headline inflation accelerated to 4¾ percent still within the 4±1 percent tolerance band. The nonfinancial public sector (NFPS) posted a deficit of ¾ percent of GDP (½ percent of GDP in 2016), below the ceiling of 1½ percent of GDP under the Fiscal Responsibility Law (FRL).

“In 2018 growth is projected to moderate to 3¾ percent, reflecting lingering political uncertainty and worsening external conditions. Inflation is expected to remain above the midpoint of the central bank’s tolerance band, on the back of mild excess demand, and somewhat higher fuel costs. Against this background, a cautious monetary and credit policy stance will be paramount to anchor expectations and gradually bring inflation and inflation expectations back to the 4 percent long-term target. The current account deficit is projected to widen to about 4 percent of GDP, reflecting higher oil prices as well as the likely normalization in the growth of remittances. Nevertheless, the international reserves are expected to remain adequate. The NFPS deficit is forecast to remain at ¾ percent of GDP, same as in 2017 and below the ceiling set by the Fiscal Responsibility Law, reflecting the government’s continued commitment to reduce and contain the vulnerabilities associated with rising public debt.

“The longer-term challenges facing the Honduran economy are centered on strengthening the country’s institutional framework to maintain macroeconomic stability and generate appropriate conditions to reduce poverty, increase employment, and raise potential GDP growth. The key long-standing issues and reforms include:

“Sustained anti-corruption efforts must continue to enhance the rule of law, which is a key determinant for both domestic and foreign investment in Honduras. In this regard, it is critical to deepen the advances made in the fight against corruption, including by raising the criminal prosecution rate, enhancing the transparency of the current asset disclosures regime of public officials, and increasing funding and effectiveness of agencies in charge of anti-corruption, anti-money laundering and combating the financing of terrorism (AML/CFT).

“Reducing tax exemptions and strengthening tax administration efforts on the revenue side, while rightsizing the wage bill and increasing overall transparency and efficiency on the expenditure side. This will provide the resources for poverty reduction and security spending while keeping the growth in public debt under control. In this regard, the government’s ongoing efforts to strengthen transparency of budget execution and controls in public procurement are particularly welcome. Enhancing the transparency of public spending executed via trust funds would also be an important step to provide greater accountability in the use of public resources.

“Also important to achieve sustainable growth is the strengthening of the monetary policy framework. A central bank law stating the primacy of the inflation objective and guaranteeing the bank’s autonomy and independence is critical to begin building the credibility of monetary policy. This should be coupled with faster development of the money and foreign exchange market infrastructure to support the transition toward a more flexible exchange rate that will provide cushion against external shocks. Continuous progress towards implementation of Basel III and other improvements in financial supervision, including careful monitoring of household debt and non-performing loans, are the key recommendations to safeguard the resilience of the financial sector.

“We welcome the government´s commitment to foster employment and reduce poverty, which includes increasing the efficiency of social spending; adopting a comprehensive plan to ensure the financial soundness of the National Electricity Company ENEE; as well as taking additional measures to reduce red tape and improve the ease of doing business. In this regard, we welcome the Presidential initiative to create the National Economic Council tasked to design, coordinate, and monitor the progress on the implementation of structural reforms.

“We commend the authorities’ decision to move swiftly to update both the base year and methodology of National Accounts and the CPI to maintain their relevance and accuracy.

“The staff team met with President Hernandez, Head of the Economic Cabinet and Central Bank Governor Wilfredo Cerrato, Minister of Finance Rocío Tábora, Minister Director of the Tax Agency Miriam Guzmán, President of the National Commission of Banking and Insurance Ethel Deras, and other members of his cabinet, other senior government officials, private sector and civil society representatives, and international donors.

“The mission would like to thank the authorities and private sector representatives for a cordial and productive dialogue, as well as for their excellent cooperation and hospitality.”